Archive for the ‘Europe’ Category

After a day in Brussels listening to European MEPs, it is clear that the Parliament vote next week on the Commission proposal to backload the auctioning timeline in Phase III of the European Emissions Trading System (EU ETS), is going to be very close. This is a policy proposal that was born out of the call by many participants in the EU ETS, as well as the European Parliament, to address the chronic allowance surplus and therefore begin to steer the CO2 price into a more useful range in terms of real action and investment. A positive vote on the proposal would also be the start of a more structured reform of the policy package designed to reduce emissions across the EU over the coming decades.

But in the frantic days left before the vote, clarity and reason are struggling to be heard over the clamour of opposition, so here are the top ten reasons why an MEP should vote to support the “backloading” amendment next week:

1. Market Confidence

The current CO2 price in the ETS is just a few euros. Even the assumption that there will be a robust price by 2030 (enough for deploying CCS in 2030s for example), but discounted back to now, should result in a higher price than the one we have. That means the market is discounting the ETS itself, in other words questioning its very existence in 2030. Nobody will invest given such an outlook. A positive vote for backloading will signal that the Parliament is prepared to act on the ETS and begin to restore confidence for energy investment decisions.

2. Low carbon Investment

Apart from its annual compliance function, which the ETS is delivering, its purpose is to provide an investment price signal. This in turn steers long term investment in the covered sector, providing support and justification for lower emission investment opportunities. The near zero price signal being seen today means the EU has returned to “business as usual” energy investment, which is even resulting in a resurgence of coal based power generation projects. This will just put upward pressure on EU emissions in the 2020s. 

3. Jobs

Rewind to 2008 and the €25-30 CO2 price, which in combination with the NER300 saw some 20+ CCS projects being considered. The construction of the world’s first CCS network was a real possibility. Today, with the exception of the UK where the necessary investment signal has been created in a national level “carbon policy bubble“, these projects have been shelved. So too have the jobs that would have been created had they gone ahead.

4. Credibility

Investment depends as much on long term credibility of the policy structure as the policy itself. Business investment will not proceed unless there is a belief that the supporting policy framework is robust and long lasting and therefore able to deliver the necessary return on that investment.

5. Leadership

While there is an issue with the EU over leading on actual emissions reduction, this isn’t the case with leadership on policy development to reduce emissions. Today, many states, provinces and countries have implemented or are in the process of implementing an ETS on the back of the initial success in the EU. They are now watching developments here closely as the EU debates the future of the system. A decision to reject the backloading proposal will potentially undermine the implementation of emissions trading globally (see 10 below).

6. Support

There is a noisy opposition to this proposal, as there was opposition in 2003 to even having an ETS and again in 2008 to building a full policy framework for managing emissions over the longer term. But many companies, institutions, business associations and individuals see the clear merit of a functioning market based approach for reducing emissions and strongly support the proposal. The voice of some European business associations on this issue is not necessarily the consolidated view of business in Europe. 

7. Europe

The ETS was designed to build on the strength of a single EU market and deliver through the synergy that it offers. A weak ETS is leading to fragmentation of this goal as national policies are developed to fill the gaps. Just look at what the UK government is having to do to shore up investment cases which would otherwise be supported by the ETS. This only means a less effective and ultimately more expensive route to the same goal. 

8. Growth

This is all about investment in the EU energy system. Without investment guided by credible policy and clear market price signals, growth stalls.

9. Environment

The carbon price delivered by the ETS is the only mechanism in place to drive the development and deployment of carbon capture and storage. Without this one critical technology, the climate issue simply doesn’t get resolved. The demand for, abundance of and low cost of extraction of fossil fuels may well be unassailable this century, so atmospheric CO2 will continue to rise. 

. . . and most importantly at #10 (well it’s actually #1)

10. Economy and competitiveness

An emissions trading system can deliver the lowest cost emission reduction pathway for the economy, but to do this it needs to be left to do the heavy lifting. The very low price of CO2 in the EU today is not a sign of low cost abatement, but quite the opposite. Abatement is being driven by other policies, with the cost to the economy probably much higher than necessary. The ETS needs to be restored as the principle driver of change in the EU energy system. This will lower energy costs in the EU, which in turns helps competitiveness.

Supporting backloading now won’t deliver all this in one go, but it will get the wheels of change in motion and importantly, signal an intent on the part of the Parliament to correct the energy and climate policy framework and make the EU ETS central to the overall delivery of current and future emission reduction goals.

The case for CCS demonstration

In recent months, particularly in the EU, the prospect of a major demonstration of CCS across various sectors and employing a variety of technologies has slipped badly. Perhaps the bottom was reached when in the EU not a single CCS project was awarded funding under the first round of the NER300, even though this mechanism was originally proposed for CCS (insertion into Article 10a of the ETS Directive, see below). Given that the second round has been announced and EU allowance prices are now even lower, the chance of a successful project under the NER300 must be close to negligible.

Up to 300 million allowances in the new entrants’reserve shall be available until 31 December 2015 to help stimulate the construction and operation of up to 12 commercial demonstration projects that aim at the environmentally safe capture and geological storage (CCS) of CO2 as wellas demonstration projects of innovative renewable energytechnologies, in the territory of the Union.

Yet this is a technology that can make a real difference to the problem of rising levels of CO2 in the atmosphere. I went further than this is my recent posts arguing that it is the only technology that can satisfactorily resolve the issue. The recently released Shell New Lens Scenarios show the impact of delay, even in a world with rapid deployment of renewable energy and its eventual domination of the energy system (Oceans scenario). The Mountains scenario sees CCS getting going in earnest in 2030, with an important start-up phase which sees some 20 million tonnes per annum of CO2 stored in 2020, rising to 400 million tpa by 2029. This means that by  2025 some 25 GW of power generation fitted with CCS is needed – there is effectively none today.

At the Gleneagles Summit in 2005, G8 leaders committed to “work to accelerate the deployment and commercialisation of Carbon Capture and Storage technology”, with a further recommendation at the 2008 G8 Summit in Japan that “20 large-scale CCS demonstration projects should be launched by 2010”. Similarly, the EU Heads of Government declared the need for 12 projects in the EU by 2015. So far, four big projects are operating and two further projects are under construction, although all are linked with process emissions of industrial facilities (various natural gas projects, a synfuels plant in the USA and the Quest oil sands project) rather than the power sector. A number of much smaller R&D projects are also in various stages of development. The G8 call was arguably linked with the political desire to limit global emissions to meet a 2°C goal (or a trillion tonnes of cumulative carbon emissions), which in itself requires CCS deployed on a major scale. As such, it is hardly surprising to see the IEA now telling us that 2°C is pretty much off the table. In the Mountains Scenario, which sees CCS finally getting going some 15 years later than the G8 call, 2°C isn’t met either, although the overshoot, while a concern, isn’t dramatic.

The lead time for any new energy technology, from pilot to the beginnings of commercial deployment and then to materiality in the energy system (>1%) typically takes some 25-30 years. I wrote about this some time ago on the back of a Nature article submitted by a colleague in our scenarios team. The various stages within this process are important, including the need for commercial demonstration. This step begins to de-risk the technology for future business investment, bringing some level of certainty to expected capital expenditure and ongoing operating costs in particular. For CCS there are other benefits as well;

  • A demonstration programme which comprises several projects begins to establish some infrastructure, which in turn lowers the cost for additional projects. Perhaps the best current example of this is in Rotterdam, where there are proposals for a CO2 pipeline loop in the industrial area of the city, connected to offshore storage in the North Sea. Given the large number of installations in the area, in combination with those further up the Rhine, real synergy is possible.
  • In some regions (and Europe is one, Germany in particular) there are growing issues with public acceptance of CO2 storage, even though there is little ongoing storage underway. A demonstration programme offers the opportunity to allay the fears related to storage.
  • Demonstration improves best practice in the operation of a CCS facility and related storage, particularly in a major grid dispatch situation.

Recently, policy makers in Brussels have started to voice the opinion that the EU could follow rather than lead on CCS. While they recognize the important role of the technology over the long term, they are questioning the need for the EU to invest and demonstrate in the short term. But waiting for others risks further delaying the deployment of this technology, which in turn is directly linked to the eventual accumulation of CO2 over this century and therefore temperature rise. Further, there are real EU projects on the drawing board today waiting for some stimulus, so doing nothing would be a real lost opportunity. The Commission is expected to publish a CCS paper later this month.

My good friend, Robert Swan, a polar explorer and environmentalist, often finishes his presentations with the quote;

“The Greatest Threat to Our Planet Is the Belief That Someone Else Will Save It.

It’s a good quote, even though it is a bit on the melodramatic side for me. But an appropriate CCS version might be:

“The real threat to the deployment of CCS is the assumption that someone else will demonstrate it.”


Dear ENVI Committee,

Next week you have to make an important decision on the future of the EU ETS. The Commission has proposed that 900 million allowances due to be auctioned at the beginning of this phase of the ETS be held back and returned to the market before the end of 2020. The objective is to remove a good portion of the allowance surplus that currently exists in the trading system and is putting extreme downward pressure on the resulting price of CO2 emissions. This isn’t a full solution to the problems that confront the trading system, but it is the only politically possible route forward that has been identified. It will provide the necessary breathing room for a more structural approach which must come over the next two years and which will cover the period through to 2030 and beyond.

The ETS was designed and implemented as the principal pricing mechanism to guide investment in power generation and industrial facilities across the EU such that long term CO2 reduction goals could be met at the lowest cost to society. Quite simply, it isn’t performing that role today. While Europe should be gradually shifting away from unmitigated coal and beginning to implement carbon capture and storage (CCS), coal consumption is on the rise and the CCS Demonstration Programme is on the brink of complete collapse. This is because the CO2 price in Europe today is effectively zero. The few Euros that an emissions allowance can command in the market is a reflection of future value, but even that is a cause for concern. At €4 today, this points to a price expectation in 2030 of €7, hardly an indication of a robust market based approach to managing emissions and introducing new energy technologies.

Many have argued that the market is working and delivering on the 2020 target. For this reason they have further stated that market intervention is not necessary. Unfortunately this is misguided and poorly informed thinking. While there is no doubt that annual compliance is functioning under the ETS and therefore the system will also force compliance in 2020, there is very clear evidence that longer term investment is not being guided by the ETS. Rather, investment is either not happening at all or is being driven by other factors and policies, some at EU level but many at Member State level as well. This is not leading the EU down a path of lowest cost emissions reduction, but is instead driving up energy costs in the EU. The very low price of CO2 in the EU does not represent low cost emission reduction opportunities being implemented, rather it is a very real symptom of a high energy cost pathway. This is important as it is not, or has ever been, the cost of CO2 that is impacting the competitiveness of EU industry. Even at previous levels of up to €30, in combination with the free allocation provisions for trade exposed industries, the CO2 price is a relatively benign factor.

The vote on backloading needs to be a “yes” vote. This signals the intention of the European Parliament to begin the process of restoration of the most cost effective approach to meeting Europe’s energy needs and reducing emissions over time. A “yes” vote won’t immediately restore the ETS to good health, but it is a start. Much work remains to be done. But following the advice of those who counsel for a “no” vote would mark the start of a very different pathway for meeting Europe’s energy needs – one that is less certain, more expensive and probably with much higher emissions over time.

Yours sincerely,

David Hone

Chief Climate Adviser, Royal Dutch Shell

Chairman, International Emissions Trading Association

The real price of CO2 in the EU

The EU Emissions Trading System (ETS) is facing tough times. Last week saw the price fall to below €3 after the European Parliaments’ Industry & Energy (ITRE) Committee voted against the Commission proposal to amend the ETS Directive to allow for backloading of ETS allowances (a compromise mechanism which will shift the auction profile in Phase III to remove allowances in the short term). At such a price level the system isn’t really functioning, rather it is little more than a short term compliance accounting system for reporting on CO2 emissions.

In effect, this means that the EU doesn’t currently have an explicit carbon price to drive change in energy and infrastructure investment, despite 10 years of policy in place designed with that single goal in mind. The very low price level also implies that there is no expectation for a real carbon price ever developing. In theory these allowances could be bought and banked through to Phase IV. Assuming a cost of capital of 5% (and of course availability of capital to do so), a €3 allowance would only need to fetch €7 in 2030 to cover this, which would be well below the price of a market which is presumably driving investment in carbon capture and storage, surely a technology being seriously considered by then. So what is the thinking that might lead to an ~80% discount in market value? Three possible scenarios could lead to such an outlook;

  1. The ETS has been stopped and the market doesn’t exist in the 2020s. In this case Phase IV would never be agreed and although there is formally no sunset clause in the system, it would effectively cease if no allowances for the 2020s were ever issued.
  2. The surplus cannot be removed by then, even with tougher targets. New crediting mechanisms continue to flood the system.
  3. Other policies will be doing the heavy lifting, leaving the ETS as a ”do nothing” policy instrument. The dominant policies will be ongoing renewable energy targets, CCS mandates, Emissions Performance Standards etc.

All of these are plausible, but I tend to think that the third one will be the ongoing problem. It is the problem today, as shown in the abatement curve chart below (an indicative CO2 price is shown on the vertical axis and the cumulative sum of reductions is shown on the horizontal access). The Renewable Energy Directive has brought projects forward which probably would not have happened until much later in the 2020s. This has had multiple effects within the EU energy system because of the presence of the ETS and its allowance based compliance. Whereas the 2020 goal might have been met through improvements in efficiency, fuel switching and the initial phase in of mature renewable energy technologies (all driven by the CO2 price), it has instead been met through a much less cost effective approach which forces the implementation of renewable energy projects first (including the less cost mature technologies), delays energy efficiency implementation and has the effect of pushing fuel switching and CCS into the 2020s and 2030s. The visible carbon price falls as a result, but the hidden carbon price operating in the economy is much higher.

 Low EU Carbon Price

 On top of this there was also the reduction in emissions as a result of the recession. This has had no real impact on the implementation of the renewable energy projects, but it further delays energy efficiency and pushes fuel switching and CCS into the 2030s and beyond. The resultant short term visible carbon price is near zero, but the same high hidden carbon price remains.

 Low EU Carbon Price - with recession 

With a near zero carbon price, no visible sign of CCS and delays in implementing energy efficiency, policy makers may then turn to further mandates, such as the case with the Energy Efficiency Directive. This, in combination with yet another round of renewable energy targets, exacerbates the situation, leading carbon market traders to take the view that their allowances will have minimal value no matter how long they wait.

Very little of this is being discussed in the context of the backloading proposal. Rather, an emotive discussion about trade exposure, the cost of carbon for energy intensive industries and the right or not of the Commission to intervene in the market is dominating the airwaves.

The real discussion needs to be around the role of mandates when an emissions trading system is in operation. As the charts above show, backloading will have very little impact if the mandate issue is not addressed as well. Nevertheless, structural reform needs to start somewhere, so let’s hope the EU Parliament Environment Committee and the Member States will take a more positive view of the importance of the ETS and therefore the backloading proposal, when they vote in February and April respectively.

In a year which saw extreme weather rise up the political agenda and the consequences of a changing climate starting to sink into our collective psyche, action to actually address the issue of rising levels of CO2 in the atmosphere remained limited.

With regards issue recognition and despite arguments about attribution, the Bloomberg Businessweek headline after Hurricane Sandy was a telling moment. But events such as this seem to have a short half life, so it remains to be seen how lasting this will be.

 The principal policy instrument to trigger action, a price on CO2 emissions, did gain political traction and coverage, but its impact remained mute. Several jurisdictions introduced carbon pricing and others continued developing approaches and/or starting up schemes already in the pipeline. Notably, despite industry resistance, Japan introduced a modest carbon tax (although there has been a change in government since then so watch this space) and Kazakhstan leapt ahead of the pack by introducing an emissions trading system for startup this week. The Chinese trial systems began to take shape and there is now serious discussion about national implementation in the 2016 5-year plan. As of January 1st the California ETS is up and running, as is the Quebec system. The Australian carbon price mechanism started in 2012 and importantly the Australian Government passed legislation to link their system with the EU ETS. But fierce opposition forced the EU to take a step back with regards its plans to cover international aviation under the EU ETS.

The EU did however take one major step forward during 2012, in its recognition that a carbon market created as a result of an ETS may need some government intervention from time to time to keep it on track and relevant. Although the issue is far from settled, there is at least a proposal on the table aimed at supporting the weak market in the EU. The move also establishes an important precedent for the future, not just in the EU but probably in the minds of policy makers globally.

With global carbon prices remaining low, the one critical technology for actually rescuing the emissions problem, carbon capture and storage (CCS), struggled badly. Shell did announce an important project in its oil sands in Alberta, but other than this little else happened. At the end of the year the EU managed to deliver a damaging blow to the technology by not coming up with a single project to support with its NER300 CCS funding mechanism, despite having nearly €2 billion in hand to spend. Instead, the money went to some twenty or so small renewable energy projects. It’s hard to overstate the importance of CCS, yet it seems increasingly distant in terms of commercialization and deployment.

From a climate perspective, the year concluded in Doha with two weeks of talks that did a lot to tidy up the UNFCCC process, but hardly pushed the agenda forward at all. If the “holy grail” of a global deal really is to be agreed by 2015, then something remarkable needs to happen during 2013.

Happy New Year!

A major setback for CCS

Perhaps the best thirty minutes I spent at COP18 in Doha was listening to a presentation by Myles Allan, Professor of Geosystem Science in the School of Geography and the Environment, University of Oxford and Head of the Climate Dynamics Group in the University’s Department of Physics. The presentation was given at the opening of the WBCSD Business Day on Monday 10th December and focused on the root issue that must ultimately be dealt with, the accumulation of carbon dioxide in the atmosphere. Myles made the point, very clearly with the aid of props, that while the UNFCCC and others argue endlessly about the flow rate of CO2 into the atmosphere (i.e. the emissions at some point in time), that fossil carbon continues to add to the carbon stock in the biosphere and that this stock is linked directly with global temperature, ocean acidity and so on. A portion of his presentation is available on YouTube. In short, the CO2 issue is a stock problem, not a flow problem. Dealing with it in terms of flow will not resolve the stock issue, at best it may delay it by a few years. At the current rate of accumulation, the 2 deg.C stock equivalent is passed in about 2043.

Myles concluded with just one key observation: that the logical conclusion of the stock approach to climate change (rather than the flow approach) is that CCS is the game changing technology. This comes from the view that the global use of fossil fuels for energy will not go away (and possibly not even decline) and therefore, to prevent the stock of carbon continuing to accumulate in the biosphere, fossil carbon must be returned to its source, the geosphere. As such, the focus of efforts in policy circles should be in getting CCS going as fast as possible.

Against this background came the news of last Friday from the European Commission regarding the award of the 1st round of NER300 project funding for CCS and novel renewable energy projects.

Nearly all RES projects were confirmed. Most CCS projects were, however, not confirmed by the Member State concerned, and therefore could not be retained. Member States were unable to confirm the projects for various reasons: in some cases there were funding gaps, while other CCS projects were not sufficiently mature to allow for such confirmation under the first call for projects.

Only one CCS project was mentioned, but this had already been withdrawn, so no CCS projects made it through to receive funding through the 1st call for projects. There is at least the small consolation that the money earmarked for the withdrawn CCS project will roll through to the 2nd call for projects, but this guarantees nothing for CCS. By contrast, 23 renewable energy projects are listed in the Commission document.

But the NER300 is a mechanism that was initially proposed to support CCS and underpin the construction of some ten demonstration projects across the EU.

It was first suggested in early 2008 by various proponents of CCS both within and outside the EU Parliament and consisted of a pool of 500 million allowances which could be drawn on in exchange for future stored CO2. In very simple terms, it would “multiply the prevailing carbon price”, which was seen as a necessary early step to kick-start this key technology. Throughout the negotiations surrounding the Energy and Climate package, the mechanism morphed somewhat: it linked itself to the New Entrant Reserve (NER), adopted novel renewable technologies, fell to as low as 100 million allowances at one point but ended up at the 11th hour as the final gavel fell at 300 million allowances (hence the name – NER300). As I described back in June;

The mechanism, in combination with a robust underlying carbon price, meant that a viable demonstration programme could emerge. The 300 million allowances could conceivably generate €9 billion in funds, which meant up to €1.35 billion for some projects (i.e. the 15% limit). With potential Member State co-funding adding additional support, a 500 MW end-to-end CCS power station was even feasible and some of the projects originally submitted to the Commission for consideration were on this scale.

But the collapse of the CO2 price in the EU throws a huge question mark over the viability of the programme. So far the European Investment Bank (charged with monetizing the 300 million allowances) have sold over a 100 million allowances at a price of around €8.10 each. That’s a good effort in the current market, but it substantially changes the economics of a project. Now the maximum grant that any given project can collect is €360 million and it will be operating in a €6 CO2 market. Even with matching funds from the relevant member state, now much more challenging due to EU financial circumstances, a large scale project looks very unlikely. Large scale early CCS projects require a CO2 price in the range €60-100, not €20-25 (assuming €6 ETS price, maximum NER 300 financing and some member state co-financing).

The selection process for projects will proceed over the balance of this year with an announcement expected in December, but at least for the CCS part of the NER300 (innovative renewable energy projects are also supported) one wonders how this will pan out.

This had all the hallmarks of a train wreck waiting to happen, with the observers watching from the sidelines. Sadly, despite the efforts of groups such as ZEP, the trainwreck is now underway. The EU Commission has followed the NER300 rules to the letter (which arguably it has to), the market isn’t providing the necessary carbon price for CCS investment and Member State support is lacking given the EU financial situation.

The end result is the sad but unfortunately predictable absence of CCS projects from a funding mechanism specifically designed to support them. While CCS projects will still develop in the UK, Australia, Canada and the USA, no single country has the ambition of the original EU demonstration programme. The NER300 process will continue but CCS may fare no better in Round 2 if action isn’t taken. The Commission and Member States need to reflect on the outcome of the first round of the NER and learn the lessons, perhaps looking again at the conditionality of the funding to ensure that the second round awards result in an overall balance between renewables and CCS across the mechanism as a whole.  The EU Commission has a real challenge in front of it to rescue the situation, although with 200 million allowances now allocated in the first round (albeit with some money returning for the failed CCS project), there is limited resource remaining for a meaningful demonstration of CCS.

If CCS is the game-changing technology for the climate issue, then we may well be on our way to a very different but much more significant trainwreck.

I came across an article from the Breakthrough Institute which argues for the benefits of government support for new energy technologies. The story is a few months old, but still highly relevant – in any case a related story is back on their front page this week. The technology in question is hydraulic fracturing (fracking) to extract natural gas from shale formations (shale gas). Breakthrough have come to the conclusion that the boom in shale gas is largely the result of considerable early investment in the technology by the US DOE. The article argues that this technology has transformed the USA energy scene, also resulting in a drop in US CO2  emissions. But the crunch point is the comparison with the EU, where the focus on emissions reduction has been through the development of carbon pricing. Breakthrough argues that the US is shifting rapidly to a lower carbon economy on the back of successful technology push policies, whereas the EU has a failed carbon market which is now even seeing a resurgence in coal use, some of it imported from the USA.

The differing experiences in Europe and the United States illustrate the relative efficacy of direct technology push versus carbon pricing in emissions reduction and advanced technological deployment. As we wrote in a February 2012 article in Yale e360, “the existence of a better and cheaper substitute has made the transition away from coal much more viable economically, and it has put wind at the back of political efforts to oppose new coal plants, close existing ones, and put in place stronger EPA air pollution regulations.”

. . . . .

America’s investments in technological innovation contrast strongly with the European Union’s preference for pricing signals. As Europe follows through on plans to build new coal plants that will burn for decades and America leads recent global decarbonization trends, we continue to find little evidence of success from the ETS or any other major carbon pricing schemes around the world.

There is no doubt that from an emissions perspective, the US is benefitting from the current gas boom. Back in June the IEA reported;

US emissions have now fallen by 430 Mt (7.7%) since 2006, the largest reduction of all countries or regions. This development has arisen from lower oil use in the transport sector (linked to efficiency improvements, higher oil prices and the economic downturn which has cut vehicle miles travelled) and a substantial shift from coal to gas in the power sector.

However, the story that Breakthrough is telling is more about linking events after the fact, rather than analyzing the real policy drivers. According to both Breakthrough and an analysis by Associated Press, DOE funding of fracking goes back decades, as does DOE funding for a range of energy technologies. However, this funding wasn’t linked to emissions reduction, but more to the general need for energy supply diversity, energy security and therefore the cost of energy. I have always argued for technology funding, it is an essential part of the policy landscape, particularly for technologies such as CCS. Canada has been active in this regard, with significant funding for CCS demonstration, such as for the Shell Quest project.

But it wasn’t the technology funding on its own that has delivered the change in the US. Price signals have played a key role, it is just that they are less transparent than the carbon price in the EU. Although there isn’t a carbon price mechanism operating in the USA today (across the whole economy), existing coal fired power stations and almost certainly any new ones being considered are still exposed to carbon pricing. This comes from the expectation of carbon pricing in the future, through regulation under the CAA or a later Congress implementing direct pricing. Shell uses such a price premise in its own projects, including those in the USA. We are on record at $40 per tonne of CO2. There are also more price signals for coal, such as from the new mercury rules.

What has worked in the USA is the combination of funding for new energy technologies and a price signal in the market which then drives deployment. It also happens that the coal fleet is old and even the longevity optimists amongst the power producers are starting to count down the number of years before replacement is due. Eventually, the combination of age, cost of natural gas, expected cost of emissions and likely investment required to keep the coal running delivers the knockout blow.

Turning to Europe, the modest resurgence in coal use comes from a similar set of sums, it’s just that the answer is different. The natural gas prices currently seen in the USA aren’t available, coal is getting cheaper thanks in part to US exports and the carbon price signal can even be locked in at relatively low and known levels by using the market. The result is less than desirable from the atmosphere’s perspective, but it is the reality of the current pricing signals. Back in June, Bloomberg reported;

Europe is burning coal at the fastest pace since 2006, as surging imports from U.S. producers such as Arch Coal Inc. (ACI) helped cut prices 26 percent in a year and benefited European power companies including EON AG. Demand for coal, the dirtiest fuel for making electricity, grew 3.3 percent last year in Europe while sales of less- polluting natural gas fell 2.1 percent, the steepest drop since 2009 . . .

None of this means that the EU approach to managing CO2 emissions is wrong or that price signals don’t do anything. Quite the reverse. It’s just that the answers coming out are currently giving some unexpected outcomes.

The Global Status of CCS

The Global Carbon Capture and Storage Institute has just released its 2012 report on the current status of CCS around the world. The headline is that CCS is clearly up and running and CO2 is being sequestered. Around the world, eight large-scale CCS projects are storing about 23 million tonnes of CO2 each year. With a further eight projects currently under construction (including two in the electricity generation sector), that figure will increase to over 36 million tonnes of CO2 a year by 2015. This is approximately 70 per cent of the IEA’s target for mitigation activities by CCS by 2015.

The flip side of this is that the rate of deployment is far below anything that remotely passes for a 2°C trajectory. The report finds that in order to maintain the path to the 2°C target, the number of operational projects must increase to around 130 by 2020, from the 16 currently in operation or under construction. Such an outcome looks very unlikely as only 51 of the 59 remaining projects captured in the Global CCS Institute’s annual project survey plan to be operational by 2020, and inevitably some of these will not proceed.

I have discussed CCS many times in the past. Given the continued abundance of fossil resources, their ease of use for both mobile and stationary energy generation, combined with the fact that they continue to be very cost competitive as new extraction technologies are introduced, it is therefore highly likely that we continue to make use of them. But as the report notes, we need to limit the increase in the stock of CO2 in the atmosphere to 1000 Gt this century (giving a 50 per cent chance of limiting global temperature rise to 2°C) which in turn requires energy-related CO2 emissions to fall to zero by 2075. The only way to square this circle will be large scale deployment of CCS.

One of the surprising aspects of the report is the review of where CCS is actually happening. Conventional wisdom says the EU then North America and that is certainly true for many of the more advanced projects, but close behind is China which has a number of projects in the identification stage of development. In fact the report finds that more than half of all newly-identified projects are located there. Using CO2 for Enhanced Oil Recovery (EOR) is being investigated as a revenue option in all the projects.

  • Daqing Carbon Dioxide Capture and Storage Project (Identify stage) – a super-critical coal-fired power plant that would capture around 1 Mtpa of CO2 through oxyfuel combustion, developed by the China Datang Group in partnership with Alstom.
  • Dongying Carbon Dioxide Capture and Storage Project (Identify stage) – a new build coal-fired power generation plant with a planned capture capacity of 1 Mtpa of CO2, also developed by the China Datang Group.
  • Shanxi International Energy Group CCUS Project (Identify stage) – a new, super-critical coal-fired power plant with oxyfuel combustion being developed in partnership with Air Products, with a capture capacity of more than 2 Mtpa of CO2.
  • Jilin Oil Field EOR Project (Phase 2) (Identify stage) – EOR operations at the Jilin oil field, where around 200,000 tpa of CO2 from a natural gas processing plant are currently being injected, are scheduled to be expanded to more than 800,000 tpa from 2015.
  • Shen Hua Ningxia Coal to Liquid Plant Project (Identify stage) – a new build coal-to-liquids (CTL) facility developed that would capture around 2 Mtpa of CO2.

Perhaps the most disappointing news comes from Europe, where the value of the main CCS capital support mechanism has been reduced to a fraction of its anticipated amount following the collapse of the EU carbon market to some €8 per tonne of CO2. The EC policy objective of having up to 12 commercial-scale demonstration plants operating in Europe by 2015 is no longer achievable, with 4–5 projects operating in the next 5–6 years being a more realistic scenario. I commented on this back in June.

As well as giving a comprehensive breakdown of all the current projects, the report does the same for policy development, support mechanisms, storage potential and the progress in the technology itself. If you want to know more about CCS then this is truly a “one stop shop”.

The report download page with laptop, iPad and Kindle versions can be found here. Alternatively, you can go directly to the PDF version here.

As Australia struggled through the ill fated CPRS legislation and finally landed with its carbon pricing mechanism, I often thought that it would be much simpler if they just joined the EU ETS. Governments don’t tend to do simple practical things like that, perhaps it makes them feel they are giving away some portion of national sovereignty or that they aren’t doing the job they were elected for (i.e. “we must invent it here” syndrome). But despite all this and having gone the very long way around to get there, Australia has, in effect now joined the EU ETS (or perhaps the ETS has joined the Australian trading system).

Last week the Australian Government and the European Commission announced that their respective emission trading systems would link up progressively over Phase III of the EU system, but for Australian entities from the start of full carbon allowance trading in 2015. This is a bold move by both parties and quite possibly one that will make others with nascent trading systems sit up and think about where they want to go. For Australia, provided the changes can be implemented by a parliament that isn’t exactly friendly towards carbon pricing (but a wafer thin majority currently is), the move cements the system into place even further, in that undoing it would likely cause some embarrassment on the international stage. For the EU, it puts the ETS back in the frame and maybe introduces some additional demand at a time of allowance oversupply, depressed prices and a consequent lack of confidence in the system. Let’s hope this move helps both sides to deliver confidence and stability in their respective systems.

A full two-way link between the two cap and trade systems will start no later than 1 July 2018. Under this arrangement businesses will be able to use carbon units from the Australian emissions trading scheme or the EU Emissions Trading System (EU ETS) for compliance under either system. To facilitate linking, the Australian government will make two changes to the design of the Australian carbon price:

  • The price floor will not be implemented;
  • A new sub-limit will apply to the use of eligible Kyoto units. While liable entities in Australia will still be able to meet up to 50% of their liabilities through purchasing eligible international units, only 12.5% of their liabilities will be able to be met by Kyoto units.

In recognition of these changes and while formal negotiations proceed towards a full two-way link, an interim link will be established enabling Australian businesses to use EU allowances to help meet liabilities under the Australian emissions trading scheme from 1 July 2015 until the full link is established.

Various Australian, EU and other websites cover all the details, so I won’t repeat them here. Rather, let me spend some time on a key issue that this move raises, namely the future design of any international framework via the UNFCCC (or other process). Both Australia and the EU have stressed that this is a bilateral linkage, to the extent that the allowance transactions will not be processed through the International Transaction Log (ITL), but CER transactions will be. However, there will still be a Kyoto AAU balancing at various times to ensure compliance in that system (although there remains considerable uncertainty with regards the issuance of Kyoto Second Period AAUs as there has been no firm agreement on the full nature of that period).

Despite this apparent distancing from the Kyoto based ITL, it must still be the case that the overarching Kyoto framework has helped this linkage – I might even go a step further here and say “allowed this linkage to happen”. Thanks to the UNFCCC architecture, these two systems grew up with enough harmony to make a linkage possible.  They “count” the same way, “track” the same way and “comply” the same way.  Both the systems have common offset arrangements through CERs under the Kyoto Clean Development Mechanism and the units created under the Australian Carbon Farming Initiative are also Kyoto compliant. This means we have the makings of a linked system with global reach.

This could be the primary goal of a new international framework, i.e. to provide sufficient tools, rules and mechanisms which countries can use in developing their carbon trading systems, thus facilitating linkage at a convenient time for those interested in doing so. Such a linkage framework could deliver the global market that we need, as shown in my illustration below (which by the way has been around for about 5-6 years now, so for me it is great to see that one of my linkage lines has finally been filled in!!).

The opportunity to devise such a framework now exists under the Durban Platform for Enhanced Action, which aims to see a new international agreement in place by 2015, for commencement not later than 2020. The agreement between Australia and the EU should be seen as a catalyst for the thinking behind what is to come.

Finally, as something of an aside, one of the major complaints by Australian companies has been that the current $23 fixed price and the future market floor price put the Australian price of carbon “out of line with the international price”. I challenged this notion in a recent post, but irrespective those who called for such alignment have pretty much got what they wanted, although obviously not in the very short term. There may be eventual irony in this, should the EU system go through something of a recovery in its fortunes. While every indicator today points to a continued depressed price through to Phase IV, stranger things have happened in commodity markets.

P.S. I still think that the simplest approach for Canada, which has been putting off economy wide carbon pricing legislation for years, would be to join the EU ETS.

Encouraging CCS in Europe

In a recent post I discussed the problems that the EU flagship programme to demonstrate CCS (carbon capture and storage) is having. With an allowance surplus building up in the ETS and a resulting low carbon price, the urgent need for commercial deployment of CCS has diminished. Furthermore, with natural gas availability growing and renewable energy becoming a sizable factor in the EU electricity mix, it may be well into the 2020s before large scale deployment of CCS is actually needed.

These developments might instill a false sense of security, in that we imagine there is no need to do anything now with regards large scale CCS commercialization. While it is clear that there is no immediate need for rapid rollout, every low carbon energy scenario still shows CCS as an essential component of energy delivery. In a posting late last year, I argued that global emissions are unlikely to be reduced at all without CCS.

Even with widespread deployment starting as late as 2030, action in this decade is still important. Early demonstration and commercialization of new technologies can be a long process. Take for example Shell’s own experience with Gas to Liquids technology. A very large scale plant is now operating successfully in Qatar, but the advanced catalysts used in the process started development in the 1980s and the small commercial scale demonstration plant in Malaysia was an early 1990s development. A final investment decision for the first full commercial deployment was made in 2006 and even then construction and startup took five years. A 10-20 year timeline for first commercial deployment is not unusual, which is one of the reasons why it takes 25+ years for new energy technologies to become globally material (>1% of the energy mix). I discussed this in a post back in late 2009.

All this still points to the need for some CCS activity in Europe this decade and for project development to proceed next decade for startup around 2030 (at the very latest). It may also be the case that a need for deeper cuts in emissions brings CCS forward.

The question of how to promote CCS activity today, in the midst of difficult economic times and carbon markets that are clearly not calling for it, is discussed in a new report issued today by the European Technology Platform for Zero Emission Fossil Fuel Power Plants (ZEP).The ZEP report, Creating a Secure Environment for Investment in Europe, looks comprehensively at short (through to 2020), medium (the 2020s) and long term (post 2030) measures. In the short term the focus must be on recalibrating the ETS, but the report also calls for a number of the measures similar (but not necessarily identical) to those being implemented in the UK as part of the Electricity Market Reform. CCS Feed-In Tariffs, CCS Purchase Contracts and CCS Capacity Payments are all discussed. These measures could also continue in some form into the 2020s, but securing early clarity on 2030 and 2040 EU carbon targets is seen as the key priority for the medium term. For the longer term, the 2050 emissions target is the key driver, but the introduction of an auction reserve price for ETS allowances post 2030 would provide investment certainty for large scale project decisions made in the 2020s. Such investments would be exposed to the prevailing carbon price in the 2030s and beyond.

The EU has put considerable effort into stimulating CCS, but the goal of early demonstration has proved to be intractable. The ZEP report provides some further thinking on the issue and because of the ZEP constituency, is backed by industry, academia and NGOs.